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The improvement of the epidemiological situation, the freezing of the EU lawsuit against Britain for violating the terms of the Brexit agreement, and the large-scale sell-off of the US dollar amid the Fed's intention to follow the path of normalizing monetary policy at a snail's pace provoked a rapid rally in GBP/USD to 1.5-month highs. Of the last 8 trading days on Forex, the pair has closed 6 in the green zone, and the bulls are determined to continue what they started.
The only thing that can stop the banquet of buyers of the pound is the "dovish" rhetoric of the Bank of England and a strong report on the state of the US labor market for July, but there are pitfalls in both cases. Although BoE's Monetary Policy Committee chief hawk Andy Haldane resigned as chief economist, at least two MPC members, Sir Dave Ramsden and Michael Saunders, have unequivocally declared their readiness to complete the £150 billion emergency asset purchase program. If the central bank votes 2-7 in favor of curtailing monetary stimulus, it will support the GBP/USD bulls. On the other hand, a rally in the sterling at the end of July may signal that such an outcome has already been taken into account in its quotes. A surprise for the market can only be 3 to 6.
Judging by the comments of the majority of the Bank of England officials, the regulator is afraid to cut monetary stimulus ahead of time in order not to stifle the economic recovery of the UK. Nevertheless, the IMF is optimistic: according to its forecasts, GDP will grow by 7%, which will be the best dynamics since 1980. And it should be noted that there are grounds for positive expectations - thanks to accelerated vaccination, the number of COVID-19 infections in Britain began to decline, the economy completely opened, and the doors for US and EU tourists, who had received both doses, swung open.
Most likely, the Bank of England will try to appear as a "dove", however, the "bears" on GBP/USD may be ruined by an increase in its inflation forecasts. Consumer prices spiked to 2.5% in June, the highest since 2018, the 3% estimate at the end of the year is bursting at the seams and is likely to be raised to 3.5%, which implies inflation of 2% in 2022 and 2023 and hints at BoE support for money market signals. They expect a 15 bp hike in the repo rate in 2022.
Inflation dynamics and Bank of England repo rates
Thus, the Bank of England needs to be extremely careful not to provoke a new bull attack on GBP/USD. On the other hand, the pound will be under pressure from expectations of strong statistics on the US labor market. Reuters experts predict employment growth by 926,000 and unemployment decline to 5.7%, which should potentially support the US dollar.
Technically, after a rapid rally, it would be nice for the GBP/USD to rest in the 1.382-1.400 consolidation range. Only a confident breakout of the resistances at 1.396 and 1.400 will allow the bulls to continue their upward hike to the target according to the Wolfe Wave pattern at 1.410. Failure to overcome the 1.396-1.400 area will indicate the weakness of sterling buyers and may serve as a reason for its short-term sales in the direction of 1.382.
GBP/USD, Daily chart
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